Should You Cosign a Loan for a Car or Motorcycle?

Should You Cosign a Loan for a Car or Motorcycle?

Your son, daughter or friend wanted to buy a car but didn’t have a good credit rating, so you cosigned a loan so he or she could buy the car.

Let’s say your friend purchased car insurance which was required by the financing company, but six months later when the insurance policy was up for renewal your friend failed to make the payment and the insurance policy was canceled. A few weeks later, your friend totaled his/her car when he rear-ended another car.

Assuming that the title was only in the name of your friend and your name was not on the title but only on the note for the loan, you would not usually be liable for damages caused in the accident.

It is possible that a claim for negligent entrustment could be made which would make you liable, but if you only guaranteed the loan and did not maintain control over the car, the claim should fail. However, if you did not have your own insurance, you would be out the money for legal defense fees if a claim for negligent entrustment is brought against you.

Leaving your name off the title and registration may protect you from liability, but you also have no recourse when your friend fails to make the loan payments. You will be responsible for the loan and have no right to take back the car because it’s not yours. If the car or motorcycle is damaged or totaled, any insurance company check will be made payable to the person on the title and not to you if you’re not on the title.

If you wait for the finance company to repossess the car, when your friend fails to make the loan payments, your credit rating will be ruined and you can be responsible for thousands of dollars of additional charges. The car will be sold at auction and you’ll have to pay the balance owed on the loan or lease.

The finance company will require proof of insurance and when notified of the policy cancellation, the finance company will likely call the loan, replace the insurance policy and charge for the cost. Since your name is on the loan note, you will also be liable for the cost. If the insurance was not replaced, you will be liable for the total loss. If not totaled, you can be liable for the difference between the amount due on the loan and the value of the car at the time of the accident.

Instead of putting your name on the title and the insurance policy, you can keep your name off the title but be listed on the insurance policy as an additional insured. Listing your name as an additional insured may even provide your friend or child with a substantial discount on his insurance.

When you are listed as an additional insured you will be notified of late payments, giving you the opportunity to make the payment to prevent cancellation. You will also be protected for liability up to the amount of coverage on the policy and the insurance company will provide you, at their cost, with legal representation in the event you are sued.

Unless you are prepared to make the loan payments without being paid back, it is not recommended that you cosign a car loan. If you do, think of it as a gift.